Macau's big spenders break new gambling records

Commentary: Business strong, but junket competition makes life harder for casinos

HONG KONG (MarketWatch) -- If there is a global credit crunch going on, no one told the gamblers in Macau who sent casino takings soaring 62% in the first quarter of the year to 29.8 billion patacas ($3.8 billion).

This means Macau generated double the gaming revenues of casinos on the Las Vegas Strip in the first two months of the year, official statistics from both jurisdictions reveal.

Arriving in Macau today, the skyline of glitzy casinos that have sprouted along the waterfront certainly makes an instant impression, never mind the mega Venetian project in the adjoining Coati strip.

When the government deregulated the gaming industry in 2001, the biggest names globally threw their hats into the ring. Sheldon Adelson and Steve Wynn -- to name a few -- all promised to build the boldest and brightest gambling palaces their egos and balance sheets would allow.

That they did, but competition in Macau has a different complexion than it does in Las Vegas, as here you're dealing with big money mainland gamblers. In Macau, the trump card is not the flashiest casino but he who has the junket operator in tow, bringing the high rollers in the door and lending them gambling chips.

Junket operators are the prime brokerage of these big spenders, who think nothing of dropping HK$10 million plus in a night. And under Macau's laws, casinos are prohibited from lending money directly to gamers.

What is surprising is the size of this so called 'VIP high roller' segment of the market. Latest figures show VIP baccarat again led expansion as casino winnings from high rollers soared almost 70% to 20.8 billion patacas, according to data released last week by Macau's Gaming Inspection and Coordination Bureau. VIP baccarat makes up 73% of all casino revenues, up from 67% a year ago

But beneath these jaw-dropping numbers, competition for gamblers is heating up, and with that, casino margins are taking the strain.

A new Credit Suisse research report says junket operators who determine the casino allegiance of their high-rolling gamblers are increasingly key to changes in market share, and therefore to gaming turnover.

In upcoming results for the first quarter of 2008, the investment bank warned to expect plenty of positive and negative surprises as the latest junket deals shake up the market.

For instance Melco PBL's
MPEL, +5.16%
has seen high rollers converging at its newly opened Crown Macau casino after cutting the junket operators a chunkier commission check on VIP gambling chip sales last December. While this secures turnover, the flip side is that it cuts into margins, as junket operators can take 40%-50% of casino earnings.

Galaxy Entertainment Group (27) appears to be one of the casualties, as it reported a quarter-on-quarter fall in earnings last Friday. It plans to fight back with a new junket alliance and expanded "jumbo" VIP gaming operations.

Credit Suisse notes Las Vegas Sands
LVS, +3.42%
raised its junket commission rate in February and cautions that rival Wynn Resorts Ltd.
WYNN, +3.38%
could be at risk from a junket defecting.

Early mover Sands Casino, part of the LVS group, should be in a better position to be loosen its purse strings, as its accounts reveal it long ago recouped the $400 million investment in the casino. It has now generated over a billion pre-tax dollars since 2004.

So far there seems little sign of these junket operators running into liquidity problems like the more illustrious names in prime brokerage world.

One of them, Dore Holdings (628), however, has seen its share price lose 70% despite receiving an outperform rating from Credit Suisse. Perhaps Macau is soaking up some of the hot money flows finding their way into China -- last week had officials of the State Information Centre complained there was US$80 billion of capital unaccounted for in the first quarter.

Still, given that this is an industry so dependent on leverage, it would be advisable to watch for any signs the credit squeeze might show up in Macau's gaming halls. And while gamblers might have plenty credit, casino operators face some other headwinds, such as rising costs, steep inflation and tighter liquidity.

Eventually the casino operators plan to diversify so their gaming revenue and junket businesses will be balanced by other revenues.

The Venetian is firmly focused on conferences, retail and entertainment as well as gambling, and another seven hotels and 20,000 hotel rooms are planned. This is at least handy for Hong Kong residents, who now get to see music acts that previously gave this region a wide berth.

There may be plenty of growth to come in Macau, but expect results that show the tide of gambling patacas aren't lifting all casino operators equally.

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